ABSTRACT
The most direct approach to dealing with the pernicious effects of asset price bubbles is to prevent bubbles from occurring or mitigate the severity of asset mispricings if they do occur. Indeed, policymakers and scholars have long implemented or proposed various regulations designed to dampen bubbles or otherwise combat “excessive speculation.” In recent years, examples of actual or proposed anti-bubble laws included the following:
In May 2007, the Chinese government imposed a tax on securities transactions to curb speculation in stocks as fears rose that the Chinese stock market was in a bubble. 1 This action followed in the wake of a long line of economic scholarship advocating for transaction taxes to remedy excessive speculation. 2
Economic and legal scholars have long seen arbitrage 3 as a cure for speculative mispricings and as a means to short circuit asset price bubbles (as Chapter 1 described in detail). 4 Scholars advocated enabling arbitrage to perform these roles better by removing a Depression-era federal securities regulation that restricted short sales. 5 In June 2007, the Securities and Exchange Commission (SEC) repealed this restriction 6 However, after the Panic of 2007–2008, the SEC reversed course and re-imposed restrictions on short sales for securities that fall below a certain price range on a given day. 7
Scholars have also characterized circuit breakers, which halt exchange trading after dramatic price declines, as a means of preventing excessive speculation and bubbles. 8 Other scholars have advocated reverse circuit breakers, which would halt trading after precipitous price gains, to quell excessive speculation. 9
